Silicon Valley Is About To Dump Overvalued IPOs On The Investing Public

March 6, 5:00 pm EST

Yesterday we talked about the big IPO agenda for the year.

We have some big Silicon Valley “disrupters” set to go public this year, including Lyft, Uber, WeWork and Airbnb.

Remember, these companies emerged from a post-Great Recession world, where pension funds and sovereign wealth funds were flooding money into Silicon Valley, following the money and regulatory favor from the U.S. government.  Of the $800 billion fiscal stimulus response to the financial crisis, the Obama administration doled out $100 billion worth of funding and grants for “the discovery, development and implementation of various technologies.”  The money followed it, and the private market valuations soared.

Were they based on reality or hype and too much money chasing the dream of the next Facebook?

Let’s take a look today at how the big “disrupters” of the past two years have fared, after much anticipated IPOs.

Dropbox:  Dropbox was priced at $21 per share.  It started trading at over $28.  Today it trades at $22.

Spotify:  Priced at $165.90 per share.  It started trading at $164.  It currently trades at $146.

Snap: Priced at $17 per share.  It started trading at $22.  Today it trades at $9.90.

Nothing good for the average investor that picked up these shares when these stocks went public.

Who has gotten rich? The founders.

The founder of Dropbox is worth $2.3 billion.  His company lost half a billion dollars last year on $1.4 billion in revenue.  Revenue growth is slowing to a near mortal 25% growth rate – and losses are widening dramatically.

Spotify’s founder is now also worth about $2.3 billion.  Revenue growth is slowing too to unexciting levels, and the company is still losing money.

What about Snap?  The Snap founder is worth over $2 billion.  Snap lost $1.2 billion last year, on $1.1 billion in revenue. Revenue growth has gone from 600%, to 100%, to 43% last year.

The hyper-growth valuations are unlikely to get hyper-growth.  I suspect we might see the same with the roster of IPOs this year.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Tech IPOs May Be Coming Late To The Party

March 5, 5:00 pm EST

There’s a lot of excitement about the building IPO docket for the year.  Let’s take a look of the lay of the land …

There is said to be more than 220 companies planning to go public in 2019.

On Friday, Lyft filed an S1 with the SEC (a prospectus like document) in preparation for an IPO.  This will be the first Silicon Valley darling to go public this year.

Lyft is the second largest ride-sharing company — owns about a third of the U.S. market, with Uber owning the rest.  Uber is expected to go public this year.  The other big ones coming:  Airbnb, WeWork and Palantir.

We’ve clearly had a boom cycle in Silicon Valley over the past decade.  But are these IPOs coming late the party?

Remember, we have an administration in Washington that has tightened the regulatory screws on the dominant publicly-traded tech giants (Facebook, Amazon, Google).  The regulatory tailwinds (or lack thereof) that they enjoyed along the path of their disruptive growth, have now turned into headwinds.  And the stocks have all been hit, as a result.

Keep in mind, the private market valuations were pumped-up in these IPO candidates when public equity markets were offering little optimism about future returns.  With that, pension money was flowing into the coffers of Silicon Valley private equity firms.  And private equity fund managers were throwing money at things — and companies have been burning through that money, ramping staff, buying fancy offices and inundating us with blitz advertising campaigns.

Safe to say there has been an overhyping of the term “disrupters.”  In many cases, we’re looking at startups trying to underprice and outspend (with our pension money) in a traditional business, without having the hurdle of making money (maybe ever).  Not surprisingly, there have been market share wins.

But public companies tend to be held to a standard: profitability.  We’ll see how they do with the shifting market environment (i.e. late cycle Silicon Valley).

Lyft will be an early indicator.  Its last private investment valued the company at $15.1 billion.  For that, in their filing, they revealed a company doing a little over $2 billion in revenue, while losing almost a billion dollars last year.  Revenue growth has been slowing, losses have been widening as the private equity investors attempt to cash out in the public markets.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Stocks Bumping Into Technical Profit Taking Levels

March 4, 5:00 pm EST

Stocks sold off sharply this morning, before bouncing nicely from the lows.   The range on the day was the third largest of the year.

The question:  Was the selling today technically-driven or was there a catalyst that introduced new risk into the market (i.e. something bigger)?

Let’s take a look at the chart …

With this sharp V-shaped recovery of the past two months, we have stocks testing these highs, and failing today.

But the failure of this level (for the moment) shouldn’t be too surprising.  Following a runup of 20%, for some this is a reasonable technical area to sell some/ to take profit.

But is there more to the sell-off this morning?

We did get an announcement that the Congressional Judiciary Committee has launched an investigation into the Trump administration.  It includes document requests from 80 people/entities tied to the administration.  They will be looking at obstruction of justice, public corruption and abuse of power (the latter of which, might be the most subjective and, therefore, threatening).

After all of the allegations and political mudslinging surrounding Trump, could this pose the biggest risk to the Trump administration and policymaking yet?  Possibly.

Congress has a unchallengeable investigatory and subpoena power.  They can dig as deeply and broadly as the want, and create as much havoc as they want, which means this may dominate what happens on Capitol Hill until the 2020 election.

Now, with all of this said, if we look at the market reaction today, as a proxy for how the market is digesting this — we did not see across the board selling.  That’s good.  If we look inside the U.S. stock market, most active stocks were a mix of up and down on the day (including up days Apple, Facebook, Baba and Amazon).  That’s good.  And foreign stocks were less impacted by the early swing in U.S. stocks.  That’s good. The emerging market futures index MXEF actually finished at the New York close UP from Friday’s close.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Key Charts Heading Into The Weekend: Stocks, Rates and China

March 1, 5:00 pm EST

As we end the week, let’s take a look at some key charts …

We finish the week with stocks trading at 16.5 times the Wall Street estimate on 2019 earnings.

That’s cheap in an economy running at 3.1% growth (for full 2018) and with the with the 10-year yield back well below 3%.

Here’s a look at yields …

As you can see, this important line continues to hold in yields, from the run-up following the optimism surrounding Trumponomics.

And here’s a look at stocks …

The important trend in stocks that held in December is from the global financial crisis-induced lows of 2009. This describes the global economic recovery.  A break of this trend would have spelled trouble.  But as we know, policymakers have reminded us that they will still, even 10-years following the crisis, do whatever it takes to keep the recovery going (and stocks are an important driver).  With that, we have another nice “V” on this 10-year uptrend.

Next, we’ve talked about the Chinese stock market as a key clue in measuring China’s willingness to make the necessary concessions to get a trade deal done. 

We finish the week on the highs, now up 23% from the lows of January.

And here’s a look at the other key proxy on U.S./China trade … the Chinese currency.
In the chart above, the falling line represents a strengthening yuan versus the U.S. dollar.

China’s currency manipulation (i.e. weak currency policy) is at the core of the global trade imbalances that precipitated the global financial crisis.  With that, the currency is a key piece of the trade and structural reform demands from the Trump administration.

You can see how China has been maneuvering to pacify currency tensions over time:
1) They slowly allowed the currency to climb (against the dollar) following threats of a big tariff on China from Graham and Schumer (yes, Schumer) back in 2005.
2) When the global economic crisis hit, they went back to a peg to protect their ability to export.
3) They went back to a slow crawl higher as tensions rose, and people began to believe the developed market economies might be passing the torch to China for economic leadership.
4) It became clear that China can’t grow fast enough in a world where developed market economies are struggling. So, they went back to weakening the currency to protect their ability to export.
5) They strengthened the yuan when Trump was elected to try to ward off a trade war.
6) Trump wasn’t placated and tariffs were launched. They weakened the currency with the idea that a threat of a big one-off devaluation in the currency might create some leverage.
7)  After trying to hold-out, it has become clear that they need to get a deal done, as the economy continues to sink.  They’ve been walking the currency higher again – a signal, along with stocks, that they are willing to make aggressive concessions to get a deal done.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
We May Be In The Early Stages Of An Economic Boom Period

February 28, 5:00 pm EST

We end the month of February today, continuing the big recovery for stocks.

After a decline of 10% in December.  We were UP 9% in January and UP 3% in February.

As we’ve discussed, the sentiment data is volatile and can take a hit when stocks fall, but it takes more sustained declines to damage the fundamental strength of the economy.  Still, the media and Wall Street are good at exaggerating the downside.  And with that, we’ve had expectations on economic data (as well as the earnings data) dialed down.  That’s good, because it sets the table for positive surprises, and we had one this morning.

The fourth quarter GDP number came in hotter, at 2.6%.  The consensus view was for 2.3%.  So here’s what full year 2018 looks like …

Q1: 2.2%
Q2: 4.2%
Q3: 3.4%
Q4: 2.6%

This gives us an average annualized growth of 3.1%.  The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

Below is what that growth has looked like against the long-term trend growth, dating back to 1947 (long-term trend growth = 3.2%).
So, we are finally approaching trend growth in 2018.
What were the experts thinking as we entered last year?

The Fed and Wall Street were looking for 2.5% growth. They undershot.

For 2019, the Fed is looking for just 2.3% growth — that was adjusted down in their December projections as they were witnessing the sharp decline in stocks.  A Wall Street Journal poll of economists back in December also showed a 2.3% growth forecast for 2019.

Again, the bar has been set low.

With that in mind, consider this:  The next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend.
Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment).
We’re already well overdue for an economic boom period.  Forperspective, let’s revisit this look at growth following the Great Depression and growth following the Great Recession …
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Expect Oil Back To The $70s, Soon

February 27, 5:00 pm EST

Yesterday Trump talked down oil prices.  Today oil prices came right back.

We’ve had a full recovery in stocks from the sharp declines to end the year.  Will oil prices also have a full recovery, back to the mid $70s?

My bet is yes, maybe much higher if we get a deal on China (and therefore an upside surprise on global growth).

Let’s take a look at this oil/stocks relationship.

You can see in the chart above, stocks and oil went down together. This is no coincidence.

Remember, a trigger for the decline in stocks from the top (October 3rd) was the implication of the Saudi Crown Prince in the murder of the journalist, Jamal Khashoggi.  Oil topped the same day, and then accelerated the day Trump spoke with the Saudi Crown Prince on the phone on October 16. Oil opened that day at $72 and hasn’t seen the level since (forty-three days later it was trading at $42).

With that, as I’ve said over the past several months, while the Fed always likes to exclude oil prices in their formula for measuring inflation, oil prices matter (a lot).  They mattered a lot in 2016 when oil prices crashed to $26.  That set off deflationary fears around the world and led to over $12 trillion in negative interest rates on global government bonds – and a response from global central banks.

So now we have another response from the Fed (and global central banks) — responding to stocks and the deflationary pressures of lower oil.

And now, importantly, the threat of sanctions on the Saudi government have now passed (which was a danger to global markets).  Trump settled on sanctions that exclude the Crown Prince and broader government.

With that, I suspect, this move above $55 in oil will sustain and lead to a catch up of the orange line in the chart, to the green line in the chart.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
V-Shaped Recovery In Stocks, V-Shaped Recovery In Sentiment

February 26, 5:00 pm EST

Jay Powell (the Fed Chair) is on Capitol Hill this week, giving his semi-annual testimony to Congress.  He reported today to the Senate Banking, Housing and Urban Affairs Committee.  Tomorrow he will sit before the House Financial Services Committee.

Remember, it was on January 4th that the Fed marched out Powell, Yellen, and Bernanke at an economic conference to reset the market expectations on monetary policy (moving from a four rate hike forecast for 2019 to a ‘wait and see’ approach).   In response to the stock market drubbing of December, it was a clear message that the Fed is done raising rates.

With that, there was nothing new today (nor should there be tomorrow, from Powell).  The Fed will do whatever it takes to keep the economic recovery going.  At the moment, that means promoting stable, low rates and a flexibility to do whatever is necessary.

Remember, we’ve talked in recent weeks about some of the negative economic data hitting (from December), that reflects the souring of economic sentiment from the sharp December decline in stocks.  But as I said, given the sharp V-shaped recovery in stocks we’ve seen since, we should “expect this data to bounce back just as sharply.”  We’re getting a taste of it this morning.

February manufacturing data from the Richmond Fed came in with a huge positive surprise.  And the consumer confidence index followed a decline in January with a big upside surprise in February.

We have a V in stocks.  And you can see the V in the data …

We’ll get the first look at fourth quarter GDP on Thursday (which will later be revised twice).  The market has been looking for 2.5% which would give us better than 3% growth for the full year 2018.  That’s “trend growth.”  And for perspective, for those unable to block out the media and political noise, that’s nearly DOUBLE the average growth of the past ten years.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Stock Market Strength Is Broad-Based, Finally

February 25, 5:00 pm EST

As we ended last week, we talked about the important signals given from Chinese markets on the prospects of a U.S./China trade deal.

Chinese stocks and the Chinese currency have been signaling China is prepared to make the necessary concessions to get a deal done.

We opened the week with more positive news on that front.  That has driven the S&P 500 back above the December 3rd highs (just before the market collapsed 20% in 15 days).

So we’ve now had a full recovery of the December losses.  But we remain 5% off of the all-time highs.  Where do we go from here?

Let’s take a look at the breadth of participation in this recovery for stocks, for clues. As we know, by design, the big market cap stocks contribute significantly to the performance of the S&P 500 (a cap weighted index).  With that, in recent years, we’ve had booms in the tech giants that have masked weakness across broader stocks.  It has been a market of some winners, and many losers.

That dynamic is changing.  As of Friday’s close, if we looked at the equal-weighted S&P 500 index, it was up 14%.  That’s a straight average performance of every constituent stock in the index.  That compares to plus 11% for the cap-weighted index.  This is the benchmark index we always hear about — deemed to be the proxy on global economic health and stability.

So what does the outperformance in the equal weighted index tell us?

It tells us that finally there is broad-based participation in the stock market.  And I would argue, it’s telegraphing a real-broad based economic boom, supplanting the “winner takes all (gutting of industries) boom” we’ve seen over the past decade (i.e. the rise of the big tech “disrupters” thanks to regulatory negligence).

A more broadly followed breadth indicator, the advance-decline line, shows the number of stocks advancing versus those declining.  And that indicator is hitting record highs.  This indicates a healthy stock market, not a topping stock market.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Chinese Stocks And The Yuan Giving Signals On A Trade Resolution

February 22, 5:00 pm EST

As the anticipation has grown on a structural reform agreement between the U.S. and China, we’ve talked about what might be the leading indicators that China will make the necessary concessions to get something done.

Remember, by the end of last year, much economic data in China was running at or worse the 2009 levels (the depths of the global economic crisis).  Clearly, they are in trouble.  As for Chinese stocks, an ugly bear market of was triggered in early 2018 when Trump’s rhetoric turned into action.  He slapped tariffs on washing machines and solar panels (a signal of bark and bite).

But as we know, by December the spiraling data in China also began taking a big toll on global markets.  With this, we’ve had responses from global central banks, including in China.

Now, Chinese stocks have been important to watch, for clues on: 1) are they doing enough to stimulate the struggling economy, and 2) (more importantly) are they taking serious steps to get to an agreement on trade with the U.S.?

With the above in mind, Chinese stocks bottomed on January 4th. That was when China and the United States announced they would hold trade talks in Beijing that following week.  That announcement represented the re-opening of trade talks, and the potential of an end to the trade war – which was a welcomed relief signal.

Chinese stocks have since represented an important signal in the recovery in global stocks.  On that note, the Shanghai Composite is now up 15% from the January 4th bottom. So, the signal has been good.  And as you can see in the chart below, we’re trading through the 200 day moving average (the purple line).

Another spot we’ve been watching in my Pro Perspective notes has been China’s currency.

China’s currency (the yuan) ends the week near its strongest levels since July.  This is China’s attempt to show the Trump administration that they are willing to make concessions on the all-important currency (the tool that has driven the massive trade disparity and wealth transfer of the past three decades).

As we head into the weekend, we have these two “leading indicators” supporting what has been maybe the most optimistic tone we’ve heard yet on an agreement.  It was announced this afternoon that the head Chinese trade negotiator would be extending his trip to Washington through the weekend.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Expect December Data To Recovery Just As Sharply As Stocks Have

February 21, 5:00 pm EST

We’re seeing some more December economic data that reflected the souring of economic sentiment from the sharp decline in stocks.

It started with retail sales last week. Stocks dipped immediately on the bad data, which proved to be a valuable buying opportunity. Today the bad number was December durable goods. These tend to be large investments that reflect optimism and these expenditures become the first to be delayed when that optimism wanes.

But less than two months later, and we have the v-shaped recovery in stocks. Expect this data to bounce back just as sharply.

We continue to get signals that some form of agreement will come from the latest round of U.S./China talks. As we’ve discussed, some of the best signals are in the commodities markets.

Remember, to end last month, we talked about the setup for a big run in commodities this year. Crude oil was up 20% in January. It’s up another 5% already in February. Copper was up 6% in January. It’s up another 4% this month. And copper is the commodity known to be an early indicator of turning points in the economy.

With this in mind, assuming we get resolution on China, and a continuation of trend growth in the U.S., we should expect this commodities rally to be in the early stages. And that should make emerging market stocks among the most attractive on the year. At the moment the MSCI emerging markets index is performing only in-line with the big developed stock markets.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.